Jay Powell: US Debt Is "Unsustainable"

Even the Federal Reserve Chair is sounding alarm bells about the size and unsustainability of the national debt.

When will America's debt problem become critical?

It has come to something when the Chair of the Federal Reserve admits that America has a debt problem, but that's exactly what happened on Sunday, when Jay Powell spoke with CBS's 60 minutes.

"The debt is growing faster than the economy, so it is unsustainable", he said. "It’s time for us to get back to putting a priority on fiscal sustainability. And sooner’s better than later... You could say that it was urgent, yes."

America's Ballooning Debt

US debt has been attracting increasing attention in recent weeks and months, as successive stand-offs in Congress have been solved, giving the green light to more and more debt issuance. At present, US debt exceeds $34 trillion—over $100,000 for every single citizen of the country—and is forecast to grow to $52 trillion by 2033.

Debt—even large debt—does not have to be a problem if it is affordable. In the past, ultra-low interest rates have meant that servicing the debt is not overly burdensome. However, the size of the debt combined with today's high interest rates means that America is now spending more than $1 trillion per year on repayments. It cannot meet these through taxation alone, and so has to borrow even more to avoid default. This problem will only get worse as the debt increases and more and more is added at the higher interest rate.

The Fed is in an unenviable position. At the last FOMC meeting, the committee agreed to hold interest rates at their current level of 525-550 bps to ensure that inflation truly is kept under control. In doing so, however, they also kept payments on the national debt at higher levels, which can ultimately have the effect of eroding confidence in the dollar and making inflation worse. At present, the expectation is that rate cuts will not start until mid-year, and there may only be four cuts in 2024, rather than the six that were originally forecast.

"Borrowing From Future Generations"

Powell made it clear that it was not the Fed's job to tell Congress what to do; that's not their wheelhouse since the two are supposed to operate independently of each other (a courtesy that doesn't always run both ways, as there can be political pressure on the Fed).

Nonetheless, he made the implications clear: There will be a bill to pay, and accumulating more and more debt shifts the burden to future generations.

In practice, there are three possible ways that the US could "pay" its debt:

  • Higher taxes (politically unpalatable)
  • Inflation (which reduces the debt in real terms, but punishes citizens)
  • Default (which would be catastrophic)

In short, there are no good options. Worse, there appears to be little appetite in Congress for reducing the deficit, meaning the trajectory for US debt is firmly upwards.

This, of course, is why we Bitcoin.

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